Using IRA Funds For Short-Term Loan is Trap for Unwary


In a recent ruling, the Internal Revenue Service ("IRS") declined to waive the 60-day rollover requirement for a taxpayer who withdrew funds from his IRA for a short-term loan to his elderly mother but failed to redeposit them within the 60-day period.  The rationale IRS' ruling was that when the taxpayer withdrew the funds, he assumed the risk that they might not be returned to him in a timely manner.

Given the economic times we live in, some people may have cash flow problems.  To help solve these cash flow problems in the short term, some people may be tempted to take money out of their IRA, but put the money back when the cash flow issue is resolved.

From a tax perspective, there is no immediate tax if distributions from traditional IRAs are rolled over to an IRA or other eligible retirement plan within 60 days of receipt of the distribution. For the rollover to be tax-free, the amount distributed from the traditional IRA generally must be recontributed to a traditional IRA no later than 60 days after the date that the taxpayer received the withdrawal from the IRA. A distribution rolled over after the 60-day period generally will be taxed (and also may be subject to a 10% premature withdrawal penalty tax).

IRS may waive the 60-day rule if an individual suffers a casualty, disaster, or other event beyond his reasonable control, and not waiving the 60-day rule would be against equity or good conscience (i.e., hardship waiver).  The IRS will consider several factors in determining whether to waive the 60-day rollover requirement, including time elapsed since the distribution, inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error, errors committed by a financial institution, etc.

Based on the IRS' recent ruling, a short-term loan from an IRA whould not amount to reasonable cause.  Therefore, taxpayers should be aware of the potential tax hazards of using IRA funds as a temporary source of cash, especially in situations where there is any uncertainty as to whether the cash will be available for redeposit before the 60-day period expires.